Consolidating Medical Debt: Is It Worth It?

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In an economy that is suffering from a COVID-19 pandemic and millions of Americans out of work, medical bills are highly likely to pile up.

Almost one-third of employed Americans have some form of medical debt, with 28% having an outstanding balance of more than $10,000. A Salary Finance study performed earlier in 2020 found that nearly a third have some form of medical debt. 54% of people with medical debt admit to defaulting on payments on those bills.

As a result of these issues, consumers are asking whether debt consolidation is a good way to pay off their medical debt.

The process of consolidating your medical debt involves combining all your medical bills into one loan and paying them all off at once. As a result, you’re still in debt, but instead of paying multiple creditors each month, you only have one creditor and one payment.

The debt you owe on your medical bills isn’t like the debt you owe on your credit cards or your bank loans. Medical debt is typically not subject to interest and can be repaid or negotiated for a lower payment in most cases.

Medical Bill Consolidation: What You Need to Know

Medical debt consolidation can be done through personal loans, home equity loans, balance transfers on credit cards, and some debt management programs.

It is important to negotiate a payment plan with your doctor when you receive your first medical bill. Medical providers should be informed if you are unlikely to be able to pay a debt. Failure to do so can lead to higher medical costs.

A medical debt consolidation program can be arranged through a bank, a credit union, an online lender, or a nonprofit credit counseling agency.

We take a closer look at some of the options you have for reducing your financial obligations.

Personal Loan

The combined medical debts will be paid off by a personal loan, but you will have to make a monthly interest-bearing payment.

Since medical debts don’t usually have interest charges, making monthly payments directly to the medical provider would be more convenient than taking out a personal loan with interest charges.

To find the best interest rate, shop around before applying for a personal loan.

Home Equity

It may be beneficial to consolidate medical debt into your mortgage debt by tapping into your home equity. For medical debt consolidation, home equity loans have the lowest interest rates and tax deductions of any loan type.

The downside is that you would be putting your biggest asset (your house) at risk to pay off an unsecured debt (medical bills), and that is never a good idea.

Your lender could foreclose on your home equity loan if you fail to make payments. If you fail to pay your medical bills, you will likely have to deal with a collection agent, and your credit score will be hurt, but at least your home is not at risk.

Credit Cards

It’s certainly tempting to move debt to credit cards in order to pay off medical debt, but it’s also a short-sighted and costly move.

It is still required that you pay off the debt within the introductory period allowed by the 0% balance transfer card (generally between 6 and 18 months), or you will face interest charges starting at 16 % or more.

Due to the 0% interest rate and the fact that there is no deadline, you could pay your medical debt every month without incurring interest charges.

It would be better to alert your health care provider about your financial difficulties and ask for options such as a reasonable payment plan or a reduced judgment. When it comes to paying off your bills, you will only be compounding your problems by using credit cards.

What Can Be The Impact Of Consolidating Medical Bills On My Credit?

As long as you make monthly payments, consolidating medical bills can improve your credit score.

You will hurt your credit score if you don’t pay your medical bills – consolidated or otherwise.

Unlike consumer debt, medical debt is treated differently by the three major credit bureaus and is given a 180-day grace period before being added to the consumer’s credit report.

During the grace period, you have time to:

• Make sure the provider corrects billing errors
• Work with the provider to negotiate a payment plan
• Get a medical advocate to help you negotiate payment plans and costs
• Provide time for payments to be made by the insurance company
• Formulating a plan for consolidation and payment
• Look into financial assistance programs offered by charities, churches, state and federal governments.

In the event that you are unable to pay your medical bills within 180 days, your provider is likely to turn over the account to a collection agency, who will then report it to the credit bureaus.

You may lose 50-100 points on your credit score if you have medical debt that stays on your credit report for seven years.

You can get your medical debt expunged from your credit report if the insurance company pays it off. On the other hand, it can remain on the credit report for up to seven years if the consumer pays off the medical debt.

Medical Debt Collections

Legislation protecting consumers from unfair collection practices must be followed by collection agencies. If you are being pursued by a debt collector, you can file a complaint and find out what your legal rights are. However, your credit report can be damaged, and they can take legal action to collect payment.

Contact the original medical provider to verify the amount and ask the collection agency for the amount of the debt. Approximately two-thirds of the complaints filed to federal regulators about medical debt collection issues were filed by people who were not owed money.

There is a shelf life to medical bills. You will no longer be able to use a medical debt that is over seven years old as a factor in your credit report as it falls under a statute of limitations. 

The bills you have paid most recently will stay on your credit report the longest, so it’s best to deal with them first.

Alternatives to Consolidating Medical Debt

Other debt-relief options are available, but they must be considered after all other options have failed, as they all come with a risk warning.

• Bankruptcy

It is the last thing anyone wants, but for consumers overwhelmed by medical debt, it may be the only option. Your credit score will be tarnished for seven to ten years after filing for bankruptcy, but it can provide emotional relief and a fresh start financially.

• Debt Settlement

Your debt can be settled for less than what you owe by making one-time, lump-sum offers. That’s the good news. You might lose any gains you think you achieved when you settle your debts due to fees and taxes.

• Plans for Debt Management

Consolidating credit card debt into one monthly payment is possible with debt management plans. The main selling point is that it helps lower interest rates on debts. However, since medical debts do not incur interest, that big advantage is lost.

Is Consolidating Medical Debt a Good Idea?

The first thing you should know before you consider a consolidation plan is that medical debt does not accrue interest.

While hospitals and medical practices eventually turn over unpaid bills to collection agencies, the debt is interest-free. Before you commit to a consolidation plan, first ask these questions:

• Is consolidating debt and adding interest a good financial decision?
• Can a plan like this actually eliminate my debt, or will it simply prolong the economic hardship until I must file bankruptcy?
• Is the plan acceptable to me, and what assets could I use as collateral?
• Is it necessary to seek help, and how much will it cost?

Getting Started

First, gather all your medical bills, verify the accuracy of the bills, and do some accounting to figure out how much the total amount needed would be if you combined them all.

After that, you will need to choose which option is the most financially sound. Think about these questions as a starting point:

• How much interest will you have to pay, on top of your existing bills, if you take out a personal loan to repay your debts?
• Credit cards offer a quick solution, but they are also extremely expensive. To have a medical debt paid off, is it worth paying double-digit interest?
• Your house is at risk when you take out a home equity loan. To pay off unsecured loans, should you really risk your secured asset?
• Can you save money, protect your credit score, and avoid collection agencies by consolidating your medical bills into one payment?

An expert from a debt consolidation company might be able to help you if you’re confused or overwhelmed by the situation. You can get educated advice on which option best fits your needs from the counselors in medical debt consolidation companies if you have any questions about these options.

If you are sickened by medical bills, good advice can be your best medicine.